Half of all Asians still living below $2/day poverty line

Economic growth

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IncomesThe good news is that the world’s development agencies are waking up to the idea that income level is going to be key to future world growth.  They are also starting to recognise that the vast majority of people in the emerging economies are not “middle-class” with near-Western standards of living.

Thus a major new Study from the Asian Development Bank (ADB) titled ‘Support for Inclusive Growth’ highlights:

“ADB’s inclusive growth framework has three pillars: promoting high, sustained economic growth (pillar 1), broadening inclusiveness through greater access to opportunities (pillar 2), and strengthening social protection (pillar 3). The study finds that ADB’s priorities have been largely skewed toward pillar 1, leaving limited support for pillars 2 and 3. As the study stresses, growth alone cannot adequately promote social inclusion. Policies and interventions to broaden access to opportunities and build strong social safety nets are also vital for achieving greater inclusion.”

The bad news is that the ADB’s earlier focus on pillar 1 has created enormous confusion amongst policymakers and companies.  It led to a belief that wealth effects caused by rising property values could somehow provide a sustainable basis for growth.

The blog has argued against this view for a long time – as in this letter to the Financial Times, 2 years ago:

“Such wishful thinking represents a significant barrier to the growth of China’s domestic consumption. It has led to a major diversion of precious resources, as companies rush to provide western-style goods for a market that doesn’t exist. Far too few understand that affordability, rather than luxury, is the key criteria for success.”

It is therefore delighted to see the ADB’s new approach, which removes the rose-tinted glasses and instead highlights:

  • Half of all Asians live below the $2/day official poverty line today
  • There are 1.62bn in this position, versus 2bn in the 1990s
  • A quarter of all Asians live below the extreme poverty line of $1.25/day

This shift in thinking is directly aligned with the blog’s own argument that age range and income level are key to future corporate profits.  But it also highlights the problems caused by the previous approach:

  • Data on income levels has been available for many years, as shown by the chart above.  It shows that average per capita consumption in N America at $60/day is 15x the average in S Asia, and 4x that in East Asia/Oceania (which, of course, includes many very high-income countries such as Japan, S Korea, Australia etc)
  • It will now take time for everyone to reorient themselves to the new approach.  The blog has lost count of the number of times it has heard the phrase “the rising number of middle class” being used to justify investments across Asia in recent years.  Now, companies will find out too late it was all a mirage, when the money has been spent
  • Even more worrying is that time is the one commodity not available.  The debt mountains that have been built to support consumption based on ‘wealth effects’ are an earthquake waiting to happen.  We are already feeling the first tremors, and they are very uncomfortable
  • Growth levels will therefore almost certainly fall sharply in the next few years, as it becomes clear that this debt can never be repaid.  This will hit profits and government finances, making it more difficult to afford the longer-term investments needed to achieve sustainable growth in the future

As a new global analysis by the Financial Times confirms, the income gains of the past 20 years may not be maintained:

Almost 3bn people in the developing world are surviving on between $2 and $10 per day, putting them above the poverty line but often still struggling for the financial security that is a middle class hallmark.”

Companies who understand this dynamic, and who have maintained sensible levels of debt, will be the big winners, as we will discuss in tomorrow’s free webinar.  Those who have done the opposite now need to change course rapidly, if they want to prosper in the future.

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